Crop Insurance Making Millionaires—with Taxpayer Money

Crop Insurance Making Millionaires—with Taxpayer Money
August 24, 2012

R.J. Lehmann

R.J. Lehmann is senior fellow, public affairs director, and co-founder of R Street Institute. (read full bio)

“Everyone in here is a millionaire” declares “Grandpa” Straub, a farmer from Fairbury, Illinois who serves as the star of a recent edition of National Public Radio’s Planet Money podcast.

Taking the current worst-in-a-generation drought as a rallying point, farm-state members of Congress from both sides of the aisle have clamored for immediate passage of a $1 trillion farm bill, and the debate has spilled over into the presidential campaign, with President Barack Obama blaming recently tapped Mitt Romney running mate Rep. Paul Ryan (R-WI) for holding up the bill. The Planet Money episode offers a sane take on the impact the drought is actually having on America’s farmers.

In short, they aren’t doing as badly as you might think they are. In fact, they’re almost certainly still doing better than most of the country.

Crop Failure Largesse

The primary reason for this is the federal crop insurance program, under which the government offers subsidized reinsurance to approved private insurance companies that provide crop insurance, while also offering subsidies to the companies to market and administer the policies and paying roughly 60 percent of farmers’ premiums, which last year cost taxpayers $9 billion.

Thus, even as the drought threatens to wipe out a significant portion of the year’s harvests, farmers enjoy a fairly cushy taxpayer-subsidized safety net, along with the assurance that post-drought crop prices are almost certain to rise.

Reporting from a claims seminar in Fairbury, Planet Money’s reporters talked to several generations of the Traub family, who confidently intoned that, even without the insurance payouts, they’re doing plenty well enough to survive the record drought. Pressed on whether he thought the government should be picking up most of the tab for his crop insurance premiums, Jim Traub (one of Grandpa’s sons) responds:

“Oh, I have an aversion to it, but they think they should have. So you’re not going to turn it down, because society’s kind of that way. I don’t see the government’s going to be less involved in crop insurance.”

Insurers Also Protected

Although the farmers might not be especially worried, one would still think these have to be rough times for the crop insurers themselves, right? Not necessarily.

There will be payouts, to be sure. As of August 10, the 15 federal crop insurers had paid out $822 million in claims this year, according to the trade group National Crop Insurance Services Inc. NCIS projects total crop losses for the year are likely to exceed the roughly $11 billion paid out in 2011 and could even reach $20 billion.

According to a study conducted for NCIS by Milliman, crop insurance indemnities in a dozen drought-affected states are projected to reach $8.8 billion. Minus $6 billion in premiums, that would mean underwriting losses of $2.8 billion.

Should claims go that high, there could be some claims to private reinsurers as well, with Munich Re projecting it could pay out as much as $200 million on agricultural loss covers. But taxpayers will absorb much of the blow, as they did in 2011 when the federal government paid about $7 billion of the $11 billion in claims.

Under the crop insurance program, the insurers cede about 20 percent of their premiums and 40 percent of their losses to the U.S. Department of Agriculture’s Risk Management Agency, which sets the Standard Reinsurance Agreement. Economist Vincent Smith of Montana State University projects there could be $18 billion of crop losses this year, with taxpayers footing the bill for up to $10 billion of that total.

Small Hit to Financial Strength

Fitch Ratings projects that although the crop insurers’ losses will impact earnings, they aren’t likely to have a material effect on the major companies’ financial strength. In fact, the two largest crop insurers—Wells Fargo and Ace Ltd.—both say they expect losses to be manageable, with Ace Chief Executive Officer Evan Greenberg noting the drought could harden rates for next year’s coverage.

“It’s possible,” Greenberg said. “It’s going to depend on global crop conditions as well as projected U.S. weather conditions.”

Complexity Supports Persistence

Which raises the question: If farmers would do fine without crop insurance, and if crop insurers remain in good shape despite the worst drought in at least 50 years, why does Congress continue to this lavish safety net for one of the nation’s best-off economic sectors?

Planet Money talked to agricultural economist Dan Sumner of the University of California at Davis, who offered some theories about why the program persists. Sumner recalled the sage words of Norfleet Sugg, former executive secretary of the North Carolina Peanut Growers Association and later head of the Agricultural Council of America, who explained to him, “The peanut program is so complicated, there’s only three people in the world that actually understand how it works. It’s my job to keep it that way.”

Sumner noted:

“As much as we tried, we weren’t going to be able to capture the essence of these programs. They were just too complicated. Every time somebody proposes one more complicated government program, I can’t help but think part of that is, the less the average taxpayer or the average analyst can figure out what this thing is about, or the average congressman for that matter, they throw up their hands and think, well, the industry must know what they’re talking about.”

R.J. Lehmann (rlehmann@rstreet.org) is public affairs director at the R Street Institute in Washington, DC. Used with permission from rstreet.org.

R.J. Lehmann

R.J. Lehmann is senior fellow, public affairs director, and co-founder of R Street Institute. (read full bio)